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Dave Ramsey: Get Out of Debt Step by Step

CBN.com
 GETTING OUT OF DEBT
Dave says the first step in getting out of debt is having a written budget. Don’t try to have the perfect budget for the perfect month because you never have those. Spend every dollar on paper before the month begins. Give every dollar of your income a name before the month begins, which is called a zero-based budget. Income minus outgo equals zero every month. If you’re married, agree on the budget with your spouse. If something comes up in the middle of the month that causes the budget to need changing, you can change the budget only if you do two things: 1) Both spouses agree to the change. 2) You must still balance your budget.

HAVE A PLASECTOMY
Dave says you have to get serious and cut up the credit cards. Dave says there is NO positive side to credit card use. You will spend more if you use credit cards. Even by paying the bills on time, you are not beating the system. The average family today carries $8,000 in credit card debt according to the American Bankers’ Association. When you pay cash, you can “feel” the money leaving you. This is not true with credit cards. If you use credit cards instead of cash, you will spend 12 to 18 percent more. If you “have to” use plastic, Dave suggests a debit card. He uses debit cards for travel, ordering on line, etc. Personal finance is 80 percent behavior. You need to cut out habits that make you spend more.

SAVE $1,000 FOR EMERGENCIES
Dave says it is going to rain and you need a rainy-day fund. The job is downsized, you get fired, the transmission goes out, etc. Life happens; this is not a surprise. Christmas is always in December; therefore it is not an emergency. Dave says save $1,000 to keep from going back in debt to cover emergencies. No more borrowing. You have to break the cycle. Your emergency fund needs to be in liquid, available cash.

USE THE DEBT SNOWBALL TO PAY OFF DEBT
Dave’s way to pay off debt is called the Debt Snowball. It is simple to understand but requires truckloads of effort. You list all your debts in order of smallest payoff balance to largest; the interest rate of the debt doesn’t matter. The reason Dave lists smallest to largest is to have some quick wins. If you go on a diet and lose weight the first week, you will stay on the diet. When you start the Debt Snowball and in the first few days pay off a couple of little debts, Dave says it lights your fire. After you list the debts smallest to largest, pay the minimum payment to stay current on all debts except the smallest. Every dollar you can find from anywhere in your budget goes towards the smallest debt until it is paid. Then, when debt number two is paid off, you take the money that you used to pay on number one and number two and you pay it on number three. Keep paying minimums on all debts. Every time the Snowball rolls over, it picks up more snow and gets larger, until by the time you get to the bottom, you have an avalanche. And you are on your way to being out of debt.

FROM RAGS TO RICHES TO RAGS
After college, Dave found a niche in foreclosure bargain real estate. With a formal education in finance, a family background in real estate and a burning desire to succeed, Dave had a head start in life. By the time he was 26,
Dave had a net worth of over a million dollars and was making $250,000 a year. His real estate portfolio was worth more than $4 million and everything seemed to be moving perfectly. Then, banks decided to trim back on real estate lending due to the 1986 real estate tax act. Most of Dave’s borrowing was in short-term notes (because most of the property he resold was for profit) so the banks invoked their right to call the notes. Dave had 90 days to find $1.2 million. He paid virtually all of it, but doing so destroyed his business and he ended up losing everything but his house and literally the clothes on his back.

“I remember the strain on my marriage,” says Dave. “It took three and a half years for paradise to completely unravel and for me to end up broke.”

From the nightmare of losing everything and the emotional pain it caused, Dave got the idea to counsel the average consumer through debt problems. In ten years, Dave says he has seen more than 10,000 foreclosures come across his desk.

“I believe it is time for the typical American family to get out of financial bondage,” says Dave. “I believe that through knowledge and discipline, financial peace is possible for all of us.”